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How Much Does Inflation Erode Your Retirement Thumbnail

How Much Does Inflation Erode Your Retirement

"...while it’s nice to have a lot of dollars, the only thing that matters is what goods and services those dollars will actually buy!"


Hi I’m Mike Frontera and welcome to another edition of Retirement Insights.

Today I want to talk a little about inflation as it relates to your wealth in retirement. Inflation is usually thought of as the increase in prices of goods and services over time, but of course it can be also be thought of as the decrease in value of your money over time. Like a boulder slowly being eroded away by ocean waves, inflation is steadily chipping away at your wealth.

So why do we have inflation? Well, it’s somewhat by design. Inflation in small amounts is actually something that we want as an economy. We have a central bank called The Federal Reserve that is tasked with maintaining a


slow rate of inflation through several different methods. They do this in part to incent people to not hoard cash and go out and spend, or to make businesses want to invest in capital improvements, or R&D, equipment etc.

Inflation has been pretty mild over the last several years and so it has just kind of hung around in the background. Most people don’t really notice it. According to the DOL (Department of Labor)’s Bureau of Labor statistics, the consumer price index has risen on average just 2.57% over the last 30 years1. If we go back 40 years, that long-time average raises to 3.50%. Now I don’t know about you but those numbers don’t really do anything for me. But-- I do like cars. So, let’s roll back the clock


and see if we can get a real world example on inflation.

So, roughly 40 years ago, if I had $28,000, I could walk into a Porsche dealership and buy a brand new 911. Arguably one of the most gorgeous, sought after, exotic sports cars that has ever graced our planet. Truly a magnificent machine. But let’s say I didn’t buy that car and instead I took my $28,000 and put it under my mattress. 20 years later I get a hankering again for a sports car and want to buy something.

Well at that time in 1999 I could take my $28,000 and buy a brand-new Mustang Cobra. It’s no super-car by any stretch, but it’s still very cool. It might not turn as many heads either, BUT it has a nice V8 engine


and will still burn the tires! But I hem and haw and end up sticking the money back under the mattress again. Fast forward now to 2016 (about 18 years later).

I pull my $28,000 out ready for my new sports car and find that I can buy…a well-equipped Honda Civic. Now, nothing against the Honda Civic, it’s a nice car! But it’s not as exciting as a Mustang Cobra. And it’s no 911. But the 911 that’s out of the question now, as they’re well over $100,000 at this point.

The point is, if you have money that is sitting under your mattress, or in a bank that’s earning very little to no interest, it’s literally losing value all the time. While the dollar amount might not change, what that dollar buys certainly does.


So while it’s nice to have a lot of dollars, the only thing that matters is what goods and services those dollars will actually buy!

Case in point, I’m literally holding 100 trillion dollars in my hand. Zimbabwe dollars. These dollars used to have value, but hyper inflation wiped virtually all of that away. Yes, technically I’m a trillionaire. But the goods and services that I can buy with this $100 trillion is nothing.

Now, I’m not recommending that you pull out every penny you have out of the bank and invest it. There is tremendous value in the safety and liquidity that you get from holding some cash.



What I am saying though is holding more cash than you need to accomplish your goals brings along additional risks that many people fail to appreciate.

Do you have questions for me? Let me know! Give me a call me at (518) 612-1060, or send me an email at mfrontera@npafinancial.com. Do you follow me on Facebook? I think that you should! You’ll see videos like this, blog and article shares on everything retirement planning. Once again, thank you for joining me. See you next time.

1. https://www.bls.gov/data/inflation_calculator.htm

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